Climate Change Policy: The European Trading Scheme (ETS)

A plenary session at the 37th IAEE International Conference in New York – titled “Climate Change & Carbon Policies – International Lessons and Perspectives,” continued to draw huge crowds as experts on climate change and carbon policies highlighted different approaches to those issues in the US, China and Europe. As expected, the audience was able to walk away with some very interesting insights and further food for thought.

In particular, Professor Denny Ellerman of the European University Institute provided fascinating insight into the European ETS scheme. Emissions of power and large industrial plants are subject to a cap by way of the so-called European Trading Scheme (ETS). Instead of fixing the carbon price, the ETS is designed to fix the total level of carbon emissions in advance. What that means is that any allowances saved by rising efficiency at one location can be traded to another location within the cap-and-trade region without altering the initially-set allowable carbon emissions total.

Given that the EU ETS is the largest cohesive cap-and-trade trading scheme in the world, there are important lessons to take away from the European system for emerging climate change policies around the world. Mr. Ellerman makes a neat distinction between what has already been confirmed by the EU ETS and, therefore, could be filed away as secured knowledge and things that still have to be learned – things we still do not know – in terms of effectively working carbon emissions reduction schemes. As for the former category, Ellerman stresses that “data is super important for cap-setting and free allocation of allowances.” Additionally, he notes that “expectations count because agents do look ahead.” It is this “expectation of future scarcity” – he explains – why the EU price for allowances will not go down to zero.

In contrast, in the latter areas of yet inadequate knowledge Ellerman points to the relation between prices and quantities – specifically asking whether the renewable development has a big effect on price. This basically centers around the question of what difference a certain reduction in billion tonnes of CO2 makes on price. Another area, where in Ellerman’s opinion, more learning is required circles around “how banking theory affects the allowance holdings.” Ellerman notes that banking theory is currently not applied to the European system.

In closing, Ellerman also offered his noteworthy perspective on the European Commission’s 2030 Proposal for climate and energy policies. The 2030 policy framework – 40 per cent GHG reduction by 2030, effective EU-wide only, non-contingent, and with a move away from carbon offsets – is meant to reform the current EU ETS. He explained that a “supermajority” in the European legislative process would be required to pass the 2030 Proposal. Only then would the current EU ETS be repealed. Conversely, without a decision on the 2030 proposal, the current EU ETS would continue past 2020. In terms of international lessons, Ellerman regards the EU ETS as a salient example and standard. Not only is it the largest existing system, it also offers useful international lessons because it is multinational. In addition but most importantly, “trading is the most promising path to global climate change,” Ellerman repeatedly stressed.

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Jared Anderson, Managing Editor at Breaking Energy, covered international oil and natural gas market fundamentals as an Analyst then Senior Analyst in the Research & Advisory division at Energy Intelligence Group. Earlier in his career, Jared spent several years working in the environmental consulting industry. He holds a Master's degree in international relations with a focus on energy from New York University, and is based in New York City.